“Auditing the IRS” is a conversation series featuring IRS watchdog Bruce Willey and tax experts, legislators, former IRS officials and other experts focused on the struggles and future of America’s most critical government agency.
This installment: Part Two with David De Jong, Chair of the Tax Law Group at Stein Sperling in Rockville, Maryland. A former president of the American Academy of Attorney-CPAs, De Jong has more than 50 years of experience in tax law, litigation and planning.
In Part One, De Jong discussed how decades of legislative changes made the tax code increasingly complex. In Part Two, he argues that IRS administrative practices can create their own barriers to compliance.
Bruce Willey: We've talked about how complexity hurts compliance. But you've argued that administrative delays and collection procedures can also discourage compliance.
David De Jong: You're right. I can point directly to one of them: The combination of the slow speed of processing and responses by the IRS and the statute of limitations for the collection of taxes owed. (Editor’s note: The IRS generally has 10 years from the date the tax is assessed to collect it, including penalties and interest.) For lack of a better word, the IRS is regularly blowing through its own statute of limitations. All of the time.
Which means that when I'm representing an individual who has only a year or two or three left to “hold out” before IRS can no longer collect a debt, the strategy for many advisors is going to be that they effectively go into a hole and only deal with the matters if they’re absolutely forced to. Because the IRS often ignores some of the large debts they’re owed, and instead puts emphasis on individuals with smaller debt.
That's something that the IRS has not done well looking at it from a government perspective. They've sent a revenue officer out to clients of mine who owe $2,500 and haven't paid, but I've had clients owing a million dollars that have managed to avoid having to pay much in at all before the statute of limitations runs out.
Now on payroll taxes specifically, there's a statute of limitations on assessment against the responsible persons, if returns are filed on time, that’s generally just 3 years. They’ve got 10 years to collect the debt, but only 3 years to assess it against the responsible individual. So that means the IRS is often too late to go after the individual who failed to pay the payroll taxes, and instead the IRS is left with just an insolvent corporation to try to collect it from.
Bruce Willey: I kind of got out of handling collection matters years ago. I couldn't consume enough Advil to stay in the practice.
David De Jong: You're very lucky.
Bruce Willey: One of the things that always struck me as very odd is that the IRS says they want to collect debt, but then they make it an insurmountable mountain with all the penalties and fees they add on. You work with people trying to pay their tax bills. These people are afraid of the IRS, they're intimidated…and I can't imagine how many clients must come to you exasperated over how they can ever resolve, say, a $20,000 tax issue that now suddenly has $80,000 as a balance due. What would you do to reform the system to make collections better?
David De Jong: That's a very good question. The penalty system needs to be revised. The penalty for failure to file an income tax return and many other returns is 5% a month for the first 5 months. So, if you're 5 months or more late, you've already added 25% onto your liability. Then the failure to pay penalty, at one half a percent per month runs. And of course, interest is running, and it's compounded daily. So if you did not file a return, and you're trying to come back into the system, let’s say 4 or 5 years after you dropped out of the system for whatever reason, the back returns will have you owing perhaps 70% or 80% more than your original tax in penalties and interest.
Now, some states, I'll take my home state of Maryland as an example, there’s a 10% penalty for late filing, late payment. It's a fixed 10% penalty, and then the interest accrues. I like that system. You pay the interest and you pay a penalty of 10%, not this grandiose penalty where the combined late filing and late payment penalty can go up to 50%.
I think it discourages people from getting back in the tax system, and that’s bad for all of us.
Bruce Willey: Yeah, and if they do come back into the system, if they enter into an installment agreement and they satisfy it, I would like to see a system where the IRS forgives the penalty at that point in time. I mean, the taxpayer is trying to come back in the system. Isn't it better for the government to have them back in the system for the next generations to come than just living outside the law? I mean, I understand the IRS needs the threat to compel people follow the law, but if somebody is doing all they can to come into compliance, what are we doing stopping them?
David De Jong: No question about that. People should be encouraged to come back into the system. I think the IRS needs to engage in some marketing – saying that even if you can't pay, file your return. That makes it easier to work things from that point.
One last thing since we’re talking about compliance and deadlines. I had a personal experience this year where two times in the last year, I got notices saying the IRS had not received my 2024 return, and then again assessing me a late filing penalty because they said I had not filed an extension when I had. The absolute rule is – if you’re sending the IRS anything that is not electronically filed, it should be sent certified, and you should be sure that on the receipt you get, that it clearly shows the timeliness of the filing. You’ll need it.
